The white paper on the State Value Added Tax (VAT) and the finance minister’s renewed commitment to the Goods and Services Tax (GST) is welcome. The move towards the State VAT has been in the works for many years. The empowered committee on State VAT has finally been able to not only get most states, with the exception of UP, to agree to joining a harmonised system of State VAT, but also to draw up a road map outlining the move towards the state VAT. The white paper is important in that it marks many years of an attempt towards a modern system of taxation. The team led by Asim Dasgupta that has achieved this is to be congratulated.The State VAT is the first step towards a single tax for the country, the GST, that is already in place in most countries of the world, including many in the region, like Pakistan, Bangladesh and Sri Lanka. It is time for India to be urgently moving towards a VAT-based GST. It is also welcome that the limit for taxation of businesses has been raised. This will not only reduce the administrative cost, without having much impact on revenues as has been shown by the Kelkar Task Force, it will also reduce opposition from small traders. This only leaves opposition from tax lawyers and sales tax officials to be handled.Many discrepancies remain. These relate to the two tax rates, the proper treatment of imports and exports and the optimal size. Hopefully, once the system is in place these would be sorted out. The biggest difficulty with the new system, however, lies in it being based on paper work. No cross state transfers can be effectively made in this set-up. The tax cannot be a proper destination based tax. This may also mean that some states may have border check-posts. This will create many countries inside India instead of making India into one single market. The Centre must now create a modern Tax Information Network enabled IT system on which the tax rides. This can be later adopted by the states when a national level GST is put in place. The states, on their part, need to realise that while fiscal federalism is important, in a globalised economy India has to compete with other countries. Fiscal federalism should be India’s strength and not its weakness.
